Charities Say Congressional Plans Could Put the Brakes on Car Donations

Nonprofit groups that benefit from car-donation programs are scrambling to preserve what has become a small but steady source of income while responding to Congressional concern that donors are claiming inflated deductions and that charities are getting too little financial benefit.

Legislation to change how donors claim deductions for cars, as well as boats and airplanes, donated to charity has been passed by both the Senate and the House as part of larger bills, and is now headed to conference committees. Both measures would force donors to overcome more hurdles to claim a charitable deduction and would probably lower the amount most donors could write off.

Members of Congress say the measures would curb abuses. But charity leaders say the changes go too far and could spell the end of car-donation programs. The Government Accountability Office estimates that about 4,000 groups nationwide accept donated cars; in some cases, the cars are used to provide services; in other instances, the cars are sold immediately to provide cash to charities.

The Senate provision, which is included as an amendment to the Jumpstart Our Business Strength Act or JOBS Act (S 1637), introduced by Sen. Charles E. Grassley, Republican of Iowa, would limit a donor’s deduction to the dollar amount for which the car was sold. Charities would be required to provide receipts to donors stating this amount, or in cases where a charity kept the car to use in its work, the charity would provide the donor with an estimated fair market value for the car.

Under current law, donors are allowed to deduct the fair market value based on a used-car pricing guide, which in many cases would be substantially higher than the price a charity received in selling a car. Donors are required to get an appraisal of the car’s worth when the value exceeds $5,000, a provision that would no longer apply if the Senate provision becomes law.

Under the House version, which some charity leaders prefer, donors would be required to either have their vehicles appraised or to use a valuation formula that would be developed by the Treasury Department when figuring their tax deduction.

A coalition of four national health charities — the American Cancer Society, the American Lung Association, the American Stroke Association, and the National Kidney Foundation — that run car-donation programs has decided to support the plan. But Jayne Mardock, national advocacy manager at the American Lung Assocation, says she would like to see the changes applied to all noncash donations rather than singling out donations of motor vehicles, boats, and airplanes.

Curbing Abuses

Members of Congress say the changes are needed to rein in donors who deduct too much for their old cars, as well as intermediaries — companies that run car-donation programs for charities — that keep what Congress considers to be too large a percentage of the profits.

A November 2003 General Accounting Office study found that for 40 of the 54 car donations examined, the charity received less than 10 percent of the value claimed on the donor’s return, including six cases in which the charity actually lost money. In all, the study estimated that deductions from car donations lowered taxpayers’ income-tax liability by an estimated $654-million in 2000.

At a hearing held by the Senate Finance Committee last month, a witness whose identity was disguised testified about alleged abuses by third-party brokers who are hired by charities to sell donated cars. He talked about a practice called “fixing cars,” in which a broker purposely disables working vehicles so that when the cars arrive at an auto auction or used-car dealership they were not likely to be sold. An affiliate of the broker would then purchase the cars at a bargain price, and the charity would get a portion of this discounted price. Then the affiliate would sell the repaired cars for a higher price and split the proceeds with the broker.

“We need to look more at those middleman contracts to find out if best practices are being used,” says a Senate Finance Committee staff member, who asked not to be named. “No more than 40 percent of the gross should be going to the middleman,” he says. He adds that the changes in the Senate bill would not force charities to do more work, since they are already required to provide donors with a receipt, but simply require them to provide additional information, what a car sold for, which is information donors want to know. “People will have greater certainty about what they can deduct,” he says, “and the IRS can effectively and efficiently administer it.”

Divided on the Solution

Although many charities acknowledge problems with the current system for writing off automobile donations, they are divided on the best way to fix them.

“We’ve been working since December with charities to come up with a proposal to deal with the fact that donors are taking too high a deduction for vehicles they donate,” says Patricia Read, vice president for public affairs at Independent Sector, a coalition of about 600 nonprofit groups and grant makers. “Unfortunately, there’s some disagreement about which proposal makes the most sense.”

Ms. Read says that one of the challenges facing charities as they lobby against the current measures is that “both are revenue raisers that close tax loopholes, and the Senate version raises more money, so it’s got some more advantages from Congress’s point of view.”

According to Congressional estimates, the Senate provision could bring in an additional $2-billion to the treasury over 10 years, while the House version could raise $600-million over the same period.

Ms. Read says one problem with the Senate version is that some charities use a vehicle for a short time and then sell it at a later date, which would mean donors might have to wait months to claim it as a deduction. For groups running small car programs, it would probably make more sense to end them rather than risk alienating donors by asking them to wait for a receipt, she says.

But charities with large programs also feel threatened. Goodwill Industries International, which brings in an estimated $12-million a year from donated cars, believes the Senate provision would ultimately end its vehicle-donation program.

“The current proposals will place onerous requirements on donors and the charities they seek to support,” says Christine Nyirjesy Bragale, a spokeswoman for Goodwill Industries International. “The proposed reporting mandates will make vehicle-donation programs cost-prohibitive for both the donor and the charity, and will result in less revenue to fund vital community services.”

Goodwill and its local affiliates keep some of the cars received overall to be used in Wheels-to-Work programs that provide former welfare recipients and others with a car to get to and from work. Other cars are sold, usually by Goodwill directly, although some affiliates hire a company to do the work. A survey by Goodwill found that of the nine affiliates that have a third party take care of selling the cars, the average amount paid to the company was 36 percent of a car’s sale price.

‘Devastating Impact’

In order to fight the changes proposed by members of Congress, 30 charities have formed a coalition called CARS — Charities Advocating Responsible Solutions — and are pressing for a different approach to curb abuses. Members in the coalition include the Alzheimer’s Association, Big Brothers/Big Sisters, Melwood, the Polly Klaas Foundation, and Volunteers of America.

CARS spokesman Thomas P. Roberts, who is a fund raiser for Melwood, in Upper Marlboro, Md., which provides services for people with developmental disabilities, says the Congressional proposals would “have a devastating impact on charities and the communities we serve across the country.”

CARS members worry that if donors with vehicles worth less than $5,000 were required to obtain an appraisal, as the House version would dictate, donations would drop off considerably. The coalition says that if charities tried to absorb the costs of appraisals to avoid losing potential donors, those expenses would take a big chunk out of their net income from the programs.

CARS and other charities also fear that companies eager to win business would start issuing inflated appraisals.

CARS has been urging members of Congress to take a different approach and:

• Require charities to provide a detailed receipt for car donations that notes any defects that would reduce the amount a charity would get for the vehicle, in addition to listing a car’s year, make, and model.
• Direct the Internal Revenue Service to give donors specific information on how to calculate a car’s fair market value that goes beyond looking at reference books and Web sites that give used-car prices.
• Prohibit people from writing off a car that is donated to charity in the same calendar year the donor acquired it. The charities say this measure would prevent people from buying used cars specifically with the goal of then donating them and claiming a big tax deduction.

Charity-Run Programs

Some charities have tried to maximize their profit by avoiding intermediaries altogether. Volunteers of America, in Alexandria, Va., takes care of selling donated cars, says Chuck Gould, the group’s national president. Mr. Gould says he doesn’t know how the net income from the sales of the cars compares with the value donors are claiming on their tax returns. But he says car-donation revenue accounts for about $10-million of the charity’s $700-million annual budget.

Many charity observers question whether the problems lawmakers are concerned with are widespread. For example, they say the General Accounting Office report that motivated the legislation examined only a handful of transactions. “The GAO looked at a pretty tiny percentage,” says Robert Small, president of Vehicle Donations to Any Charity, a company that helps oversee such programs for charities.

His company, he says, gives 56 percent of gross proceeds on average to charities. Mr. Small says any for-profit company that helps charities sell donated cars should be able to deliver at least 50 percent of total gross proceeds to the nonprofit organization.

Mr. Small also says Congress is taking too narrow a view when trying to determine the values versus the costs of car-donation programs. He says that in addition to wanting to encourage philanthropy, the government has an environmental interest in promoting such programs. “Without a vibrant vehicle-donation industry, these vehicles would be sold to people without the resources to keep them up,” he says. “Many of them would ultimately be abandoned on the streets of our cities and cost far more than the donation tax benefit to dispose of them.”

Mr. Roberts, a spokesman for the CARS coalition, says his group’s members are willing to support changes in legislation governing car donations.

“We do have a responsible solution, and we’re advocating it,” he says. “We’d like to see our measure adopted so we can go back to doing our business, which is to everyone’s mutual benefit. It’s a good program that could be made better; it needs a tune-up, not an engine overhaul.”